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Tail risk, systemic risk and spillover risk of crude oil and precious metals

Ahmed, R., Chaudhry, S.M., Kumpamool, C., Benjasak, C. (2022) Tail risk, systemic risk and spillover risk of crude oil and precious metals. Energy Economics, 112 . Article Number 106063. ISSN 0140-9883. (doi:10.1016/j.eneco.2022.106063) (KAR id:96227)

Abstract

The relationship between oil prices and metal prices has been extensively investigated. However, the tail risk, systemic risk and spillover risk of oil prices have not been investigated via extreme value theory (EVT). We use this novel approach to determine the tail risk of oil, precious metals, how much risk they pose to the financial system and to what extent a shock in oil prices spill over to other precious metals as well as from the financial system. We use long time series of daily data from 1st January 1987 to 31st December 2021 as long time series is required for the EVT. The data is based on the total return index (RI) of four precious metals including gold, platinum, palladium and silver. Our results show that the tail risk of these metals is lower during the crisis period except the Covid-19 pandemic crisis. Most importantly, gold is a safer asset due to the lowest tail risk among four precious metals, indicating the claim that gold is a precious asset to mitigate the returns during market downturns and acts as a ‘safe haven’. Moreover, we also find that extreme systemic risk (tail-β) for crude oil and selected precious metals reduces during crisis period. This is also recognising the fact that these commodities act as a prospective asset for portfolio diversification to hedge against financial assets' volatility. Finally, the spillover risk among crude oil and selected precious metals varies over time, especially during the crisis period and crude oil is an important stimulator of the spillover risk for precious metals. By using our findings, financial market investors can improve their investment planning to attain the maximum advantage of portfolio diversification. Financial managers can further apply these results in forecasting to estimate future global oil market trends for improving their hedging skills and portfolio performance.

Item Type: Article
DOI/Identification number: 10.1016/j.eneco.2022.106063
Uncontrolled keywords: Commerce; Costs; Crude oil; Financial markets; Gold; Investments; Oil spills; Time series, Crude oil and tail risk; Extreme value theory; Financial system; Long time series; Metal prices; Oil Prices; Portfolio diversification; Risks management; Spill over; Systemic risks, Risk management, crude oil; financial system; future prospect; precious metal; price dynamics; risk assessment; spillover effect
Subjects: H Social Sciences > H Social Sciences (General)
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Funders: University of Kent (https://ror.org/00xkeyj56)
Depositing User: Rizwan Ahmed
Date Deposited: 16 Aug 2022 10:42 UTC
Last Modified: 13 Nov 2023 00:00 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/96227 (The current URI for this page, for reference purposes)
Ahmed, R.: https://orcid.org/0000-0002-1457-4115
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